The Return of History

  • The crisis in the Ukraine has multiple disruptive long-term implications for Europe. Still, the use of military force by Russia remains very unlikely. Putin has obtained control of the Crimea, which has been the essential goal. Markets may need another week or two before they feel comfortable with the uncertainties here but we are unlikely to see much further selling of major equity markets.
  • We demonstrate with particular reference to consumer stocks that it is impossible to understand the return-to-normal of Europe’s domestic value assets without reference to its mirror image; the rise of investment risk attached to the beneficiaries of global growth.
  • Major European indices will not be able to sustain a recovery until the pressure upon large-cap global stocks is relaxed. The next few weeks will probably be decisive from this perspective. We explain why we expect the conditions for renewed advance to be in place by early April.

Recommended sector and market asset allocation

The third market setback since the phase of consolidation began last November is the most substantial for Europe’s markets. There has been the realisation of irreconcilable perspectives. The Ukraine has been Putin’s line in the sand. The crisis has multiple disruptive long-term implications for Europe, reviving old debates and calling into question the assumption of expanding exchange with Russia. Still, the use of military force by Russia remains very unlikely because it would be counter-productive. Putin has obtained control of the Crimea, which has been the essential goal. Although there is the possibility of low-level conflict Russia is unlikely to seek to extend annexation to the Eastern Ukraine. An unsettled context of this kind may dissuade buyers but it is unlikely to lead to much further selling of major equity markets. Our understanding is that financial markets will need another week or two before they feel comfortable with the uncertainties that we are dealing with here. Anxiety about China is a familiar friend by comparison with the Ukraine. China psychosis has become one of the most characteristic features of this cycle.

We demonstrate with particular reference to consumer stocks that it is impossible to understand the return-to-morenormal of Europe’s domestic value assets without reference to its mirror image; the rise of investment risk attached to the beneficiaries of global growth. We have said that we expect the long phase of consolidation of equity values to come to an end in April-May. Major market indices will not be able to sustain a recovery until the pressure upon Europe’s large-cap global stocks is relaxed. We think that the next few weeks will probably be decisive from this perspective. First, we see improvement in the macro-economic news flow from America with the spring. Second, we see a divergence between very negative investor sentiment and the actual behaviour of emerging markets, most of which display resilience. We suspect that emerging markets will perform rather better than expected in Q2 and into the summer, thereby relaxing the pressure upon globally-exposed stocks. Third, the fixation upon low inflation and the comparative strength of the Euro should ensure that the bull market in higher risk credit in the euro zone extends through Q2. We are not yet confident that European equity can sustain a recovery. However, we suspect that the conditions for renewed advance will be in place by early April. At this juncture we think that it is inappropriate to reinforce even further the emphasis upon domestically-dependent assets in our recommended portfolio.

Weightings and asset allocation for the MSCI Europe Universe



17/03/2014 Neutral weight in MSCI (%) 2-yr beta values
(vs MSCI)
Tactical sector rating Recommended allocation (%)
Consumer Discretionary 9.9 1.1 OW 13
Automobiles & Components 3.0 1.6 OW 4
Consumer Durables & Apparel 2.7 1.2 OW 3
Consumer Services 0.9 0.9 OW 2
Media 1.9 0.8 OW 3
Retailing 1.3 0.9 OW 2
Consumer Staples 14.1 0.5 UW 8
Food & Staples Retailing 1.7 0.8 UW 1
Fod Beverage & Tobacco 10.7 0.5 UW 6
Household & Personal Product 1.8 0.5 UW 1
Energy 9.4 1.0 UW 7
Financials 21.6 1.5 OW 25
Banks 11.0 1.5 OW 12
Diversified Financials 4.0 1.6 OW 5
Insurance 5.6 1.4 OW 6
Real Estate 1.0 1.1 OW 2
healthcare 12.7 0.5 N 13
Healthcare Equipment & Services 1.2 0.4 N 1
Pharmaceuticals & Biotechnology 11.5 0.5 N 12
Industrials 11.6 1.1 N 12
Capital Goods 9.0 1.2 N 9
Commercial Services & Suppy 1.4 0.8 UW 1
Transportation 1.2 1.0 OW 2
Information Technology 3.1 1.0 OW 4
Software & Services 1.4 0.9 N 1
Technology & Hardware Equipment 0.9 1.2 OW 1
Semiconducors 0.9 1.0 OW 1
Materials 8.1 1.3 N 8
Telecommunication services 5.5 0.8 OW 6
Utilities 3.9 0.9 N 4
Exposure to risk
(beta value)
  1.06    
Lquidity ratio   4%    
* The exposure to risk is measured by the weighted average of 2-y betas.
We manage the liquidity ratio within a 0-10% rank.
Source: Kepler Cheuvreux